The Next Big Spending Spree

As the economic indicators turn down and election year politics heats up,
the calls from politicians for more government intervention and enhanced economic
stimulus are becoming more strident. Last week, with the onset of the general
presidential campaign, and with increased attention on the economy shown by
the Bush administration, I could not help but think that something big was
in the air. And by big, I mean the kind of massive new Federal spending initiatives
that we haven't seen since the Great Society of the 1960's.

In particular, Fed Chairman Ben Bernanke's June 4th address to the rain-soaked
Harvard graduating students provided much food for thought. In it, the Chairman
spent a great deal of time discussing both the burdens imposed on the economy
by high energy costs and dependence on foreign oil and the positive
economic effects offered by more robust fiscal stimuli (which is economic speak
for increasing government spending without increasing taxes). It occurred to
me that Bernanke was perhaps laying the groundwork for the next great Federal
spending campaign. As has been the case in the past, Federal spending is touted
as a means to fix our nation's social and structural problems, while simultaneously
igniting economic growth. Although this is a mix that no politician can resist,
all it promises the citizenry is botched policy and hyperinflation.

It appears that, despite government statistics showing sluggish growth, our
economy is heading into a recession, perhaps severe. Depression is also a possibility.
While the government and financial elites are only grudgingly coming to this
conclusion, the rank and file has accepted the reality and is demanding solutions.
The most politically "attractive" way out appears to be to lower interest rates
still further and encourage more spending both on a personal and Federal level.
However, big expansions of government spending may encounter resistance, and
as a result would need to be carefully packaged. Spending on alternative energy
just may fit the bill.

Although few deny that the development of alternative fuel sources would be
a good thing for this country and the world, it is wrongheaded to believe that
government-directed spending can bring about meaningful change on that front.
Government spending involves three major problems: inefficiency, political
bias and major cost over-runs.

Almost without exception, the executives within government (bureaucrats) are
unskilled in business. Although many are academically gifted, few have experience,
or interest, in balancing investment and financial risk. History has shown
time and again that government spending economic development is notoriously
wasteful, and leads to enormous taxpayer liabilities and unintended consequences.
For example, the vast government spending over decades to reduce U.S. poverty
has failed lamentably. Some would argue that has even contributed to the institutionalization
of poverty. Similarly, increased government spending on education has led to
steady declines in educational quality.

By promoting and sponsoring inefficient solutions, government spending can
push out entrepreneurs, who might otherwise revitalize an industry. Indeed,
it is government spending that has almost single handedly transformed our once
great "producer" nation into a "consumer" nation. Once established, government
spending programs never disappear. It is certain that any new bureaucracy created
to develop alternative energy will persist indefinitely, whether or not it
succeeds at all.

What history has clearly shown is that government "non-spending", in the form
of reduced taxes and regulation that has proved the greatest boost to enterprise.

In truth, politicians are much more interested in the spending than they are
in the results. In distributing taxpayer money politicians can play the part
of Santa Claus, especially if they don't raise taxes to pay for the goodies.
In so doing, they are reading directly from the textbooks of John Maynard Keynes,
who somehow gained academic transcendence by claiming the government can jump
start the economy by simply printing money and spending it.

Of course, there is a price to be paid for such deficit spending, a little
nuisance called inflation. When the government prints money to meet its obligations,
it debases the currency. In effect, it levies an inflation tax to make up the
difference. If the authorities can disguise the inflation in the short term,
then so much the better for them. Not so much for the rest of us.

No one should be fooled by all this talk of a government led effort that will
finally wean us from our dependence on foreign oil, rid the planet of its environmental
woes, and supercharge the economy in the process. Instead, it's simply a recipe
for more bureaucracy and higher inflation. Have we all forgotten how the "Guns
and Butter" of the 1960's led to the stagflation of the 1970's? Our politicians
are banking on it.

For a more in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar denominated investments, read
Peter Schiff's book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to
order a copy today.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.